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Contingent capital: the trigger problem

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  • Edward S. Prescott

Abstract

Price triggers in contingent capital bonds are analyzed. Pervasiveness of multipleequilibria and nonexistence of equilibrium in theoretical models is illustrated. Evidence of these problems from market experiments is summarized. Possible solutions are evaluated.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 11-07.

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Date of creation: 2011
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Handle: RePEc:fip:fedrwp:11-07

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Keywords: Financial markets ; Financial institutions;

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References

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  1. Edward S. Prescott, 2011. "Contingent capital: the trigger problem," Working Paper 11-07, Federal Reserve Bank of Richmond.
  2. Philip Bond & Itay Goldstein & Edward Simpson Prescott, 2010. "Market-Based Corrective Actions," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 781-820, February.
  3. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  4. Marshall, David A. & Prescott, Edward Simpson, 2001. "Bank capital regulation with and without state-contingent penalties," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 139-184, June.
  5. Douglas Davis & Edward S. Prescott & Oleg Korenok, 2011. "An experimental analysis of contingent capital triggering mechanisms," Working Paper 11-01, Federal Reserve Bank of Richmond.
  6. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
  7. David A. Marshall & Edward Simpson Prescott, 2004. "State-Contingent Bank Regulation With Unobserved Actionas And Unobserved Characteristics," Working Papers wp2004_0407, CEMFI.
  8. Alon Raviv, 2004. "Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes," Finance 0408003, EconWPA.
  9. Douglas D. Davis & Korenok Oleg & Edward S. Prescott, 2011. "An Experimental Analysis of Contingent Capital with Market-Price Triggers," Working Papers 1102, VCU School of Business, Department of Economics, revised Apr 2013.
  10. Edward S. Prescott, 2001. "Regulating bank capital structure to control risk," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 35-52.
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Cited by:
  1. Edward S. Prescott, 2012. "Contingent capital: the trigger problem," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 33-50.
  2. Fernando Díaz & Gabriel Ramírez & Kenneth Daniels, 2013. "Corporate Bond Clawbacks as Contingent Capital," Working Papers 44, Facultad de Economía y Empresa, Universidad Diego Portales.
  3. Jens Hilscher & Alon Raviv, 2012. "Bank stability and market discipline: The effect of contingent capital on risk taking and default probability," Working Papers 53, Brandeis University, Department of Economics and International Businesss School, revised Jan 2014.

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